Jakarta’s gamble: a big jump in the minimum wage

Joko ‘Jokowi’ Widodo, Jakarta’s new governor, officially approved a massive 44 per cent increase in the nominal minimum wage for the capital city on 22 November.

Understandably the move was greeted as a victory by the union movement, and especially by a significant share of the city’s three million wage employees who earn the minimum wage or less. Needless to say, most business spokespersons opposed the magnitude of the increases.

Jokowi was taking a popular and bold, yet quite controversial, step not only on behalf of his city but also, indirectly, for the country. Jakarta is a bellwether for the entire country when it comes to the minimum wage. About to become IDR2.22 million per month (around US$230) in 2013, the minimum wage in Jakarta is among the highest in the country, and the wage which most industrial workers and governments take into account when negotiating increases in their own districts and provinces.

Jokowi’s decision came ahead of most of the other governors, who also take into account the decisions of the district (kabupaten) wage councils when ruling on minimum wage levels. The industrial districts surrounding Jakarta responded with similar or even larger proposed increases in the minimum wage. In the Greater Bandung and Surabaya regions, Medan and Batam, where wages are slightly lower, similar percentage increases were subsequently proposed to the governors, despite equally strong resistance from employer groups.

As industrial action intensified and tempers flared among unions and employer representatives this November, the government appears to have endorsed Jokowi’s move. The President declared that the era of ‘cheap labor’ (buruh murah) policies was at an end and the Vice President, Boediono, noted that  labour welfare as one of the government’s main objectives, and urged employers to pay close attention to employees’ needs. However, at the same time, the government has also appointed a special task force to monitor employment developments, presumably partly as a response to over-reaching on the minimum wage increases.

Why such large increases in 2012–13? Three main factors appear to be at play. First is an increasingly unified and vocal union movement, including close collaboration between several of the four labour confederations and union federations. The main elements in the union reform platform have been the abolition of outsourcing of labour recruitment, getting rid of the ‘cheap wage’ policy and the introduction of a more union-friendly social security law (to be implemented in 2014–15). The union led a series of very effective and mostly peaceful national strikes on these issues in the major industrial centres from July 2012.

Second, from a government perspective there has been a growing sense that Indonesia should no longer continue to depend on mobilising low-wage labour to promote industrial development and exports, as in earlier periods. The argument goes that it should instead encourage investment and higher productivity through a variety of policies, such as trade policy and creating a more skilled, elite labour force.

Third, there is a genuine fear that blue-collar workers — who struggle to earn US$2 a day per capita — are being left behind, as the middle class earning a respectable US$4–10 per capita a day grows in leaps and bounds.

How will investors be affected by these developments? Certainly, high wages and labour costs are unlikely to deter investment in lucrative resource-based and more capital-intensive industries, a point which unionists and the government have been quick to emphasise. They are likely, however, to lead some more labour-intensive firms to reassess their investment plans, and there are already signs that this is happening among large players in footwear (such as Adidas and Bata), an industry that had only just begun to recover from the doldrums of the first half of the 2000s.

More generally, besides a rise in the level of real wage costs, other factors related to this round of negotiations may contribute to slower investment and employment in the future: the lack of transparent decision making by the government; failure to follow its own guidelines in areas like the minimum wage (for example, by adopting bogus cost-of-living estimates to support large wage adjustments); and a display of union muscle in garnering support through ‘sweeping’ operations in the main industrial areas.

There is no doubt that labour regulations are often by-passed. The repeated failure of half-hearted attempts to address the very high rates of severance for laid-off regular workers has meant that this issue has been taken off the law reform agenda for the present. Ironically, it is precisely these clauses in the labour law that appear to have contributed to the proliferation of fixed-term contracts and outsourcing, delivering low wages that are fiercely contested by the unions.

But it is questionable whether big minimum wage hikes are the solution to improving the welfare of labouring families. Jokowi has been elected partly for his empathy with Jakarta’s poor. It is not clear that large increases in the minimum wage will help, especially if it also brings a drift of job seekers to the city in search of plum jobs.

Meanwhile, at the national level, few politicians are willing to publicly admit that besides serving the interests of the small minority of regular employees in larger firms, a de facto high-wage policy will probably result in fewer good jobs for unskilled workers. This will be one area of public policy closely watched by many investors in the coming year. Cooler heads will need to engage with populists in seeking to ensure greater consistency between wage and employment policies.

Chris Manning is an Adjunct Associate Professor at the Arndt-Corden Department of Economics at the Crawford School of Public Policy, the Australian National University. He is currently a consultant  at the Support for Economic Analysis Development in Indonesia (SEADI) Project funded by USAID in Jakarta.